Saving Charitable Settlements

Transcription

1 Fordham Law Review Volume 83 Volume 83 Issue 6 Volume 83,Issue 6 Article Saving Charitable Settlements Christine P. Bartholomew SUNY Buffalo Law School Recommended Citation Christine P. Bartholomew, Saving Charitable Settlements, 83 Fordham L. Rev (2015). Available at: This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact tmelnick@law.fordham.edu.

2 ARTICLES SAVING CHARITABLE SETTLEMENTS Christine P. Bartholomew* This Article defies the conventional wisdom that all charitable distributions from a class action settlement fund are types of cy pres. Instead, it proposes a radical delineation between cy pres remainders (meaning settlement funds left over after individual monetary distributions) and charitable settlements (meaning money initially distributed to charities as part of class action settlements). While both have cy pres roots, these two settlement structures have been conflated, jeopardizing the potential utility of charitable settlements. After articulating more precise nomenclature for these distinct distribution methods, this Article justifies why we must preserve charitable settlements. This defense is particularly timely, as charitable settlements face growing attacks spurred by Chief Justice Roberts s comments in the 2014 Marek v. Lane appeal. Once unchained from the strictures of the cy pres doctrine, charitable settlements become a tool to promote the larger regulatory objectives underlying class action procedures, including access to justice and deterrence. INTRODUCTION I. CHARITABLE SETTLEMENTS IN CLASS ACTIONS A. The Rise of Charitable Distribution B. Judicial Evaluation of Charitable Settlements II. THE CASE FOR CHARITABLE SETTLEMENTS A. Charitable Settlements Vindicate Substantive Rights B. Charitable Settlements Deter Wrongdoing C. Collusion and Procedural Concerns Are Unfounded Collusion Fears Are Overblown Charitable Distributions Do Not Create Procedural Problems * Associate Professor, SUNY Buffalo Law School. The author would like to thank Anne Mullins, Emily Grant, Joe Mastrosimone, Rebecca French, S. Todd Brown, Patrick Long, Lise Gelenter, Rick Su, Debbie Bassett, and Stephen Paskey for their insightful feedback and support. Thanks also to the organizers and participants at the 2014 Washburn University Junior Scholars Workshop, where an early version of this Article was presented. Special thanks to my research assistants, Andrew Clement and Kathleen Wysocki, for their tireless work. 3241

3 3242 FORDHAM LAW REVIEW [Vol. 83 III. PROTECTING CHARITABLE SETTLEMENTS THROUGH CLEARER GUIDELINES A. Clearer Trigger for Impracticability B. Clearer Nexus Requirement C. Calculating Attorneys Fees for Charitable Settlements CONCLUSION INTRODUCTION The next frontier of class action reform pits a legal favorite against a legal villain. Charities have long been judicial darlings. 1 By contrast, recent decisions demonstrate a clear disdain for class actions 2 and the lawyers who bring them. 3 The two intersect in charitable class action settlements, often called cy pres. Charitable distributions equitably solve settlement disbursement problems, particularly in cases where administrative costs exceed individual compensation. 4 Take, for example, a small-stakes class action settlement where individual class members stand to recover $3. Because some class members are difficult to locate or forego making claims, significant settlement funds may be leftover. What should be done with the money? To date, the standard solution is to distribute the remainder to a non-profit or charity. In approving such distributions, courts use the cy pres doctrine, an equitable concept that allows a court to modify trust funds used for a specific charitable purpose when the trust is no longer viable See, e.g., Wooton v. Fitz-Gerald, 440 S.W.2d 719, 726 (Tex. App. 1969) ( [C]harities are favorites of the law. ); see also In re Farrow, 602 A.2d 1346, 1348 (Pa. Super. Ct. 1992). 2. See, e.g., Muehler v. Land O Lakes, Inc., 617 F. Supp. 1370, 1375 (D. Minn. 1985) ( The judiciary have not always been receptive to creative and efficient ways to vindicate the rights of large groups of victims. We have now seen that many judges openly and on the record have suspicion and disdain for class actions as a means of redress. ); Jean Macchiaroli Eggen, The Synergy of Toxic Tort Law and Public Health: Lessons from a Century of Cigarettes, 41 CONN. L. REV. 561, 606 (2008) (discussing how current class action reform demonstrate[s] the suspicion and even disdain with which the class action device is viewed in some circles ). 3. John C. Coffee, Jr., Understanding the Plaintiff s Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 COLUM. L. REV. 669, n.3 (1986) ( [I]t is interesting to note the frequency with which judicial opinions favoring new restrictions on the availability of class actions or other remedies criticize the plaintiff s attorney. ); J. Thomas Rosch, Comm r, FTC, Promoting Innovation: Just How Dynamic Should Antitrust Law Be? 19 (Mar. 23, 2010) (discussing how recent Supreme Court precedent... has shown a disdain for the private class action bar ). 4. See, e.g., Powell v. Georgia-Pacific Corp., 119 F.3d 703, 706 (8th Cir. 1997); In re Agent Orange Prods. Liab. Litig., 597 F. Supp. 740, 841 (E.D.N.Y. 1984); In re Wells Fargo Secs. Litig., 991 F. Supp. 1193, 1194 (N.D. Cal. 1998). See generally RACHAEL P. MULHERON, THE MODERN CY-PRÈS DOCTRINE: APPLICATIONS & IMPLICATIONS (2006) (discussing the application of cy pres in the class action context). 5. RESTATEMENT (THIRD) OF TRUSTS 67 (2003).

4 2015] SAVING CHARITABLE SETTLEMENTS 3243 Now, take a slightly different scenario. What if the parties anticipated the low claims rate from the outset? Since the administrative costs for distributing settlements often range from $5 to $10 per class member, such costs could exhaust a substantial portion of the settlement fund. To solve this problem, the parties negotiate a settlement agreement that from its inception distributes the money to a related charity or non-profit. This type of settlement is now in jeopardy. Just last term, in Marek v. Lane 6 an appeal stemming from a class action over Facebook s Sponsored Stories feature Chief Justice Roberts signaled his interest in removing such settlements from the judicial toolkit. The appeal challenged a settlement directing Facebook to distribute $6.5 million to create a nonprofit organization that provides online privacy education. 7 Because of settlement pay-out complications, 8 the distribution was in lieu of any monetary payment to class members. 9 After approval from the trial court 10 and Ninth Circuit, 11 objectors appealed to the U.S. Supreme Court. 12 The Supreme Court denied the appeal 13 but not before Justice Roberts used the petition to issue a public statement against charitable class action settlements. 14 Such a statement accompanying a certification denial is rare particularly for Justice Roberts. 15 Justice Roberts described what he characterized as the disconcerting feature[] of the settlement. 16 Citing legal scholarship critical of class actions, 17 Justice Roberts left little doubt about his skepticism of such settlements, noting his fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be S. Ct. 8 (2013). 7. Id. at Id. at Id. 10. Lane v. Facebook, Inc., No. C RS, 2010 WL (N.D. Cal. Mar. 17, 2010). 11. Lane v. Facebook, Inc., 696 F.3d 811, 816 (9th Cir. 2012), reh g en banc denied, 709 F.3d 791 (9th Cir. 2013). 12. Petition for Writ of Certiorari, Marek, 134 S. Ct. 8 (No ). 13. Marek, 134 S. Ct. at Id. 15. Robert M. Yablon, Justice Sotomayer and the Supreme Court s Certiorari Process, 123 YALE L.J. F. 551, (2014) (noting such statements are issued just a handful of times each year, most frequently by Justice Sotomayor, not Justice Roberts). 16. Marek, 134 S. Ct. at Id. (citing Martin H. Redish et al., Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 FLA. L. REV. 617, (2010) [hereinafter Redish et al., Cy Pres Relief]). Professor Martin Redish has published numerous works critical of class action mechanisms. See, e.g., MARTIN H. REDISH, WHOLESALE JUSTICE: CONSTITUTIONAL DEMOCRACY AND THE PROBLEM OF THE CLASS ACTION LAWSUIT (2009); Martin H. Redish, Class Actions and the Democratic Difficulty: Rethinking the Intersection of Private Litigation and Public Goals, 2003 U. CHI. LEGAL F. 71, 71 (suggesting class actions are judicial blackmail ); see also Jay Tidmarsh, Superiority As Unity, 107 NW. U. L. REV. 565, 568 (2013) (describing Redish s significant contributions to legal scholarship on class actions).

5 3244 FORDHAM LAW REVIEW [Vol. 83 selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on. This Court has not previously addressed any of these issues. 18 Roberts s shot across the bow is hardly the first attack on class actions. Procedural gatekeeping in class actions is on the rise. 19 Private enforcement of business torts is significantly more difficult than a decade ago. 20 However, the open invitation for objectors to bring a better case before the court is the Court s first strike at class actions settlement approval stage. 21 Given the Facebook settlement in Lane and Roberts s accompanying call to arms, questions about charitable class action settlements are ripe for scholarly examination. 22 To date, however, no scholarship or jurisprudence has distinguished between various charitable distribution structures; instead, the trend is to conflate multiple, distinct methods under the generic rubric of cy pres. 23 Scholars and the judiciary have explored arguments for and against cy pres remainders, i.e., charitable distributions of leftover settlement funds Marek, 134 S. Ct. at Christine P. Bartholomew, Death by Daubert: The Continued Attack on Private Antitrust, 35 CARDOZO L. REV. 2147, 2163 (2014) (discussing increased procedural gatekeeping in class actions); Sheldon Whitehouse, Restoring the Civil Jury s Role in the Structure of Our Government, 55 WM. & MARY L. REV. 1241, 1261 (2014) ( [Justice] Roberts[ s] Court decisions have also restricted access to class action litigation. ); Scott Dodson, Squeezing Class Actions, SCOTUSBLOG (Aug. 30, 2011, 3:35 PM), Myriam Gilles & Anthony Sebok, Crowd-Classing Individual Arbitrations in a Post- Class Action Era, 63 DEPAUL L. REV. 447, 457 (2014) ( Over the past decade, the Supreme Court and a number of influential circuit courts have revealed deep-seated skepticism (and hostility) to class action litigation, finding doctrinal and policy-based rationales to support cutting back on this potent procedural device. ); see also Dodson, supra note 19 ( The Supreme Court s 2010 Term in particular evinces both skepticism of and hostility to class actions. ). 21. Daniel Fisher, Roberts Puts Cy Pres Settlements in Crosshairs As He Lets Facebook Pact Pass, FORBES (Nov. 5, 2013, 9:43 AM), /11/05/roberts-puts-cy-pres-settlements-in-crosshairs-as-he-lets-facebook-pact-pass/. 22. Partly in response to Justice Roberts s concerns, the Federal Rules Advisory Committee s Subcommittee on Rule 23 recently circulated a draft amendment to Rule 23 to address cy pres distributions. See ADVISORY COMM. ON CIVIL RULES, RULE 23 SUBCOMMITTEE REPORT 264 (2015), available at RulesAndPolicies/rules/Agenda%20Books/Civil/CV pdf. 23. See generally Wilber H. Boies & Latonia Haney Keith, Class Action Settlement Residue and Cy Pres Awards: Emerging Problems and Practical Solutions, 21 VA. J. SOC. POL Y & L. 267, (2014); Natalie A. DeJarlais, The Consumer Trust Fund: A Cy Pres Solution to Undistributed Funds in Consumer Class Actions, 38 HASTINGS L.J. 729 (1987); Brian T. Fitzpatrick, Do Class Action Lawyers Make Too Little?, 158 U. PA. L. REV. 2043, 2080 (2010); Jennifer Johnston, Cy Pres Comme Possible to Anything Is Possible: How Cy Pres Creates Improper Incentives in Class Action Settlements, 9 J.L. ECON. & POL Y 277, 290 (2013); Kerry Barnett, Note, Equitable Trusts: An Effective Remedy in Consumer Class Actions, 96 YALE L.J (1987). 24. See, e.g., Boies & Keith, supra note 23, at ; DeJarlais, supra note 23; Fitzpatrick, supra note 23, at 2080; Johnston, supra note 23, at 290; Barnett, supra note 23, at In fact, the Civil Rules Advisory Committee has recognized the debate and is

6 2015] SAVING CHARITABLE SETTLEMENTS 3245 However, distributions as in Lane, where an earmarked portion of a settlement went to a charity, have yet to be specifically analyzed. In this particular form, settlements are consciously structured for exclusive distribution to third parties: charitable distributions are not reserved for unclaimed funds but instead substitute for distributions to class members. 25 This Article coins a new term charitable settlements to describe such distributions. Distinguishing between cy pres remainders and charitable settlements is not merely an exercise in semantics. Charitable settlement challenges raise basic questions about whether the purpose of a damages class action is compensation or social justice. Borrowing from cy pres doctrine requirements, some contend monetary class action settlements must always first attempt a distribution to class members. 26 This position bars most charitable settlements. In small stakes cases, individual distribution is often costly if not impossible. 27 Some critics already have submitted draft legislation prohibiting all charitable distributions. 28 Questions about the propriety of charitable settlements impact more than just the settlement approval phase of class actions. Challenges to such settlements now bleed into the class certification process, with courts entertaining arguments that class actions should not be certified if only a charitable settlement is likely. 29 For example, in Ramirez v. Dollar Phone Corp., 30 Judge Weinstein denied class certification for a group of lowincome, non-english-speaking, immigrant calling card consumers. 31 currently exploring potential options regarding such settlements. See ADVISORY COMM. ON CIVIL RULES, supra note 22, at (discussing various perspectives on cy pres distributions). 25. See, e.g., Lane v. Facebook, Inc., 696 F.3d 811, 817 (9th Cir. 2012); In re Checking Account Overdraft Litig., 830 F. Supp. 2d 1330, 1356 (S.D. Fla. 2011); In re Toys R Us Antitrust Litig., 191 F.R.D. 347, (E.D.N.Y. 2000). 26. See, e.g., Boies & Keith, supra note 23, at 281 ( [A] cy pres distribution of residual funds to a third party is permissible only when it is not feasible to make distributions to class members in the first instance or to make further distributions to class members. ). 27. See Fitzpatrick, supra note 23, at 2079; see also Susan Beth Farmer, More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought by State Attorneys General, 68 FORDHAM L. REV. 361, 393 (1999) ( Sometimes funds remain undistributed because the costs of distribution outweigh the individual share to which each... group member is entitled. ); Goutam U. Jois, The Cy Pres Problem and the Role of Damages in Tort Law, 16 VA. J. SOC. POL Y & L. 258, 264 (2008) ( [T]he costs of identifying and notifying the class members may be higher than the amount of their potential recovery, such that notifying the members would deplete the entire fund. ). 28. Lawyers for Civil Justice s draft legislation aims to limit charitable settlements by attacking them on two fronts. See LAWYERS FOR CIVIL JUSTICE, TO RESTORE A RELATIONSHIP BETWEEN CLASSES AND THEIR ACTIONS: A CALL FOR MEANINGFUL REFORM OF RULE 23 (2013), available at LCJ%20Comment_Class%20Action%20Reform_ pdf. The first proposal would flatly prohibit any settlement that distributed funds to non-class members. Id. at 8 9. In the alternative, the legislation pushes for extreme reform by denying class attorneys compensation for funds given to nonclass members, thus undercutting the likelihood that small-stakes cases will be brought in the future. Id. at See, e.g., Ramirez v. Dollar Phone Corp., 668 F. Supp. 2d 448 (E.D.N.Y. 2009) F. Supp. 2d 448 (E.D.N.Y. 2009). 31. Id. at 467.

7 3246 FORDHAM LAW REVIEW [Vol. 83 Individually, alleged damages were minimal 32 making this a case wellsuited for a charitable distribution in place of direct compensation. However, the court held that because consumers suffered only small individual damages, a class action was not superior to other avenues of redress, such as legislative reform. 33 Accordingly, resolving how charitable settlements provide class members valuable relief is imperative for settlement approval and for class certification inquiries. This Article sounds a different note, demonstrating how taking charitable settlements off the table would effectively gut the use of class actions for private enforcement of laws designed to protect consumers. 34 The Article proceeds as follows. Part I details judicial response to cy pres remainders and charitable settlements, explaining their shared origin, but more importantly, exploring the practical and conceptual differences between the two. It proposes the term charitable settlements to highlight these important differences. Part II defends charitable settlements, detailing their equitable and theoretical justifications. In doing so, Part II details, and then debunks, criticism of such settlements. With the theoretical roadblocks cleared, Part III identifies discrete and practical alterations to judicial evaluation of charitable settlements. These revisions strike a balance between saving charitable settlements and maintaining rigor in the settlement approval process under Federal Rule of Civil Procedure 23(e). I. CHARITABLE SETTLEMENTS IN CLASS ACTIONS Understanding charitable settlements requires some background on the cy pres doctrine and class action settlements. This part discusses: (1) the rise of charitable distributions and (2) judicial evaluation of charitable settlements. A. The Rise of Charitable Distribution Like many other areas of law, class actions are likely to settle before trial. 35 All federal class action settlements are evaluated by the same standard, Federal Rule of Civil Procedure 23(e), which requires fair, reasonable, and adequate settlements. 36 While courts encourage 32. Id. at 450 (noting the named class representative s claim would be for approximately $2). 33. Id. at 468 ( In the present case, the only adequate and appropriate way to protect the rights of the Rule 23(b)(3) class is through regulation and enforcement by a federal administrative agency. ). 34. See, e.g., In re Serzone Prods. Liab. Litig., 231 F.R.D. 221, 240 (S.D. W. Va. 2005) ( A class action significantly reduces the overall cost of complex litigation, allowing plaintiffs attorneys to pool their resources and requiring defendants to litigate all potential claims at once, thereby leveling the playing field between the two sides. (citing In re Agent Orange Prod. Liab. Litig., 597 F. Supp. 740, 842 (E.D.N.Y. 1984))); see also William B. Rubenstein, A Transactional Model of Adjudication, 89 GEO. L.J. 371, 433 (2001) ( Class actions can reduce disparities in bargaining power between plaintiffs and defendants. ). 35. WILLIAM B. RUBENSTEIN ET AL., NEWBERG ON CLASS ACTIONS 13:1 (5th ed. 2014). 36. See FED. R. CIV. P. 23(e)(2). This standard equally applies post-certification and to classes certified for settlement purposes.

8 2015] SAVING CHARITABLE SETTLEMENTS 3247 settlements, 37 the approval process is extensive. 38 Courts consider: (1) the litigation s complexity and duration; (2) the class s reaction to the settlement; (3) the stage of the proceedings; (4) the risks of establishing liability and damages; (5) the risks of maintaining a class action; (6) the defendant s ability to withstand a greater judgment; (7) the settlement s reasonableness in light of the best recovery; and (8) its reasonableness in light of all the attendant risks of litigation. 39 If the proposed settlement satisfies these criteria, the court grants preliminary approval. 40 It is then vetted by class members, who are notified of the pending settlement. 41 Disgruntled class members must elect one of two options: (1) they can opt out of the settlement, which preserves their due process rights and allows them to bring a subsequent suit for the alleged misconduct; or (2) they can object. 42 Once a class member opts out, he 37. See RUBENSTEIN ET AL., supra note 35, 13:1 (noting that there is a strong judicial policy in favor of class action settlement ) (internal quotation marks omitted); see, e.g., In re HealthSouth Corp. Secs. Litig., 572 F.3d 854, 862 (11th Cir. 2009) ( Public policy strongly favors the pretrial settlement of class action lawsuits. (quoting U.S. Oil & Gas Litig., 967 F.2d 489 (11th Cir. 1992))); Robinson v. Shelby Cnty. Bd. of Educ., 566 F.3d 642, 648 (6th Cir. 2009) ( [P]ublic policy strongly favors settlement of disputes without litigation.... Settlement agreements should therefore be upheld whenever equitable and policy considerations so permit. (quoting Ford Motor Co. v. Mustangs Unlimited, Inc., 487 F.3d 465, 469 (6th Cir. 2007))); Macedonia Church v. Lancaster Hotel, LP, No (TLM), 2011 WL , at *9 (D. Conn. June 9, 2011) ( Federal courts strongly favor and encourage settlements, particularly in class actions and other complex matters, where the inherent costs, delays, and risks of continued litigation might otherwise overwhelm any potential benefit the class could hope to obtain. ). 38. Class actions pursued under Fair Labor Standards Act section 216(b) are beyond the scope of this Article. Section 216(b) does not apply in this case because it deals specifically with claims for minimum wages or overtime pay. See, e.g., Sari M. Alamuddin et al., Differences Between Rule 23 Class Actions and FLSA 216(B) Collective Actions; Tips for Achieving Class and Collective Action Certification: And Certification Post-Dukes, 890 PRACTISING L. INST. 293 (2012). Unlike compensatory Rule 23 cases, where class members generally are included unless they opt-out of the settlement, section 216(b) claims are described as opt-in actions because party plaintiffs must give written consent to become a party in the action. Id. at Some courts reference these factors by different names (e.g., the Reed factors and the Girsh factors). Despite different names, what each list of factors evaluates is common. Compare In re Cendant Corp. Litig., 264 F.3d 201, (3d Cir. 2001) (citing Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975)) (Girsh factors), with In re Oil Spill by Oil Rig Deepwater Horizon, 295 F.R.D. 112, 146 (E.D. La. 2013), and In re Heartland Payment Sys., Inc. Customer Data Sec. Breach Litig., 851 F. Supp. 2d 1040, 1063 (S.D. Tex. 2012). 40. See, e.g., Cook v. Howard Indus., Inc., No. 2:11CV199-KS-MTP, 2013 WL , at *2 (S.D. Miss. Mar. 11, 2013); Wallace v. Powell, 288 F.R.D. 347, 371 (M.D. Pa. 2012); In re Linerboard Antitrust Litig., 321 F. Supp. 2d 619, 633 (E.D. Pa. 2004). 41. See FED. R. CIV. P. 23(e)(1) (requiring the court to direct notice to all class members who would be bound by the proposal ). The purpose of such notice is to permit absent class members an opportunity to review the settlement terms and be heard if they want to object or respond to the proposed settlement. See, e.g., In re Prudential Ins. Co. Am. Sales Practice Litig., 148 F.3d 283, (3d Cir. 1998); Diaz v. Trust Territory of Pac. Islands, 876 F.2d 1401, 1407 (9th Cir. 1989). 42. FED. R. CIV. P. 23(e)(4) (5). Opt-out numbers matter. First, as part of the settlement approval, courts often inquire about the number of opt-outs as an indicator of the fairness of the settlement. Second, some settlements are structured to include blow provisions meaning if there are too many class members who opt-out, the settlement is no longer

9 3248 FORDHAM LAW REVIEW [Vol. 83 loses standing to object to the settlement. 43 After hearing objections, the court decides whether to grant final approval. 44 Once the settlement is approved, eligible class members usually stand to receive a monetary distribution. However, given the representative nature of class action suits, many class members cannot be located or are either unable or unwilling to satisfy claim requirements. 45 Some class members never learn of the settlement 46 or forego filing claims. 47 Even with directly mailed settlement checks, some are returned or never cashed. 48 Other times, the claim s process costs exceed individual settlement amounts. This is particularly true with low individual damage cases (often called smallstake claims ), where the time and effort involved may not incentivize class members to submit claims. 49 Hence, distribution of settlement funds is a key issue in any damages class action under Federal Rule of Civil Procedure 23(b)(3). 50 When settlement funds cannot be distributed to class members, courts can return the money to defendants ( reverters ); let the money escheat to the state ( escheatment ); or find an equitable way to distribute the money under the cy pres doctrine. 51 Of these, courts often reject reverters and binding. See, e.g., Carlough v. Amchem Prods., Inc., 10 F.3d 189, 196 (3d Cir. 1993). Hence, opt-outs serve as a stopgap for potentially problematic settlements. 43. See Mayfield v. Barr, 985 F.2d 1090, 1092 (D.C. Cir. 1993); New Mexico ex rel. Energy & Minerals Dep t v. U.S. Dep t of the Interior, 820 F.2d 441, 445 (D.C. Cir. 1987); see also Jenson v. Cont l Fin. Corp., 591 F.2d 477, 482 n.7 (8th Cir. 1979); In re Sunrise Sec. Litig., 131 F.R.D. 450, 459 (E.D. Pa. 1990); RUBENSTEIN ET AL., supra note 35, 13: MANUAL FOR COMPLEX LITIGATION (FOURTH) (2004). 45. See MARCY HOGAN GREER, A PRACTITIONER S GUIDE TO CLASS ACTIONS 37 (Supp. 2012). 46. See, e.g., Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1306 (9th Cir. 1990) ( [A] substantial number of class members would never be located for distribution of the damage award. ). 47. See, e.g., SEC v. Bear Sterns & Co., 626 F. Supp. 2d 402, 405 (S.D.N.Y. 2009); Folding Carton Antitrust Litig., 557 F. Supp. 1091, 1104 (N.D. Ill. 1983). Foregoing claims filing is a particular problem for elderly or ill class members. Rhonda Wasserman, Cy Pres in Class Action Settlements, 88 S. CAL. L. REV. 97, 104 (2014). 48. See, e.g., All Plaintiffs v. All Defendants, 645 F.3d 329, 330 (5th Cir. 2011) ( The settlement administrator sent checks to the last known addresses of plaintiffs, but many were returned as undeliverable or were never cashed. ); Powell v. Ga.-Pac. Corp., 119 F.3d 703, 707 (8th Cir. 1997) ( [O]ver 125 checks were returned as undeliverable. ). 49. See, e.g., Nachsin v. AOL, LLC, 663 F.3d 1034, 1037 (9th Cir. 2011); Fitzpatrick, supra note 23, at 2080 ( [S]ometimes the amounts class members are entitled to under the judgment are so small that they do not come forward to claim their awards. ). 50. FED. R. CIV. P. 23(b)(3) (setting forth the requirement for a monetary damages class action). The 1966 Amendment to Rule 23 resulted in larger classes, which correspondingly made it more difficult to reach all class members. See Johnston, supra note 23, at 281 (discussing how the 1966 amendments to the Federal Rules resulted in increased use of class action procedures). This amendment resulted in the growth of class actions in the 1970s. Id. It was during the rise of class actions that problems with the one plaintiff/one check settlement model came to light. Id. This Article focuses exclusively on 23(b)(3) class actions. 51. RUBENSTEIN ET AL., supra note 35, 12:28; see also Six (6) Mexican Workers, 904 F.2d at 1307.

10 2015] SAVING CHARITABLE SETTLEMENTS 3249 escheatment. 52 Reverters undermine class actions deterrence goals, while escheatment is overly cumbersome and risks only benefiting local governments rather than advancing the goals of the underlying claims. 53 Consequently, courts instead approve settlements that provide alternative distributions under an expansive interpretation of the cy pres doctrine. 54 Cy pres, meaning as near as possible, 55 is an equitable doctrine that allows the court to modify trust funds used for a specific charitable purpose when the trust is no longer viable. 56 Goree v. Georgia Industrial Home 57 provides a discrete example. There, the testator bequeathed money to the Central Howard Association, an Orphan s Home located in Macon, Georgia. 58 However, no such association existed. Consequently, the court applied the cy pres doctrine, modifying the trust to allow the money to help orphaned children in Macon, Georgia. 59 While the cy pres doctrine originated from trust law over a century ago, it since has been used in a variety of contexts including class actions. 60 Courts have used cy pres as a shorthand for many different class action settlement structures during the last thirty years. Such options once included price rollbacks, discounts, and coupons. 61 But these distribution 52. See, e.g., In re Lease Oil Antitrust Litig. (No. II), No (MDL), 2007 WL , at *18 (S.D. Tex. Dec. 12, 2007) (rejecting escheatment); Sylvester v. CIGNA Corp., 369 F. Supp. 2d 34, 46 (D. Me. 2005) (rejecting settlement involving reverter); accord Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 785 (7th Cir. 2004) (labeling a reversion provision a questionable feature of a settlement agreement); Sylvester, 369 F. Supp. 2d at 52 ( [R]everter clauses are generally suspect and need to be viewed cautiously since they undercut the deterrent effect of class actions... ); Zawikowski v. Beneficial Nat l Bank, No. 98 C 2178, 2001 WL , at *2 (N.D. Ill. Mar. 22, 2001) ( [R]eversion provisions need careful scrutiny. ). But see In re Online DVD-Rental Antitrust Litig., No , 2015 WL , at *8 (9th Cir. Feb. 27, 2015) (permitting reverter). 53. See Boies & Keith, supra note 23, at 269; 2 JOSEPH M. MCLAUGHLIN, MCLAUGHLIN ON CLASS ACTIONS 8:15 (10th ed. 2013) ( [A]n earmarked distribution to the government is cumbersome because it entails government involvement. ). 54. See, e.g., In re Motorsports Merch. Antitrust Litig., 160 F. Supp. 2d 1392, 1395 (N.D. Ga. 2001) ( [T]he substantive policies underlying the statutes upon which the plaintiffs sued would dictate a preference for an appropriate cy pres distribution rather than a reversion of undistributed funds to the defendant, the alleged wrongdoer. (quoting HERBERT B. NEWBERG & ALBA C. CONTE, NEWBERG ON CLASS ACTIONS (3d ed. 1992))). 55. RONALD CHESTER ET AL., THE LAW OF TRUSTS AND TRUSTEES 431 (2000) (quoting Brudenell v. Elwes, 102 Eng. Rep. 171, 174 (1801)). 56. RESTATEMENT (THIRD) OF TRUSTS 67 (2003) S.E. 684 (Ga. 1938). 58. Id. at Id. at See RESTATEMENT (THIRD) OF TRUSTS 67 ( Occasionally, the term cy pres is casually used to refer to reformations or judicial modifications in other contexts in which some modified effect is given to dispositions that would otherwise exceed what the law allows. ); cf. Nancy A. McLaughlin, Rethinking the Perpetual Nature of Conservation Easements, 29 HARV. ENVTL. L. REV. 421, 437 (2005) (applying the cy pres doctrine to donated conservation easements). 61. See Theodore H. Frank, Cy Pres Settlements, CLASS ACTION WATCH, Mar. 31, 2008, at 1; Johnston, supra note 23, at 292.

11 3250 FORDHAM LAW REVIEW [Vol. 83 methods fell out of favor because they often advantage defendants by generating new sales out of alleged misconduct. 62 Concerns about nonmonetary distributions spurred courts and the judiciary to limit such settlements, particularly for coupon deals. In 2005, the Class Action Fairness Act 63 (CAFA) created significant obstacles for settlement approval. Because of these restrictions, by 2008 the term cy pres generally referenced any settlement where funds went to a charity or a nonprofit because of distribution problems a settlement structure CAFA was notably silent on. Rather than recognizing different forms of charitable distributions, courts and scholars universally call any class action settlement where money goes to charities or non-profits cy pres. In some instances, courts use cy pres to signify the distribution of leftover settlement funds. 64 Other times, cy pres means settlements given entirely to charity. 65 Still other times, cy pres means settlements where the money is split between class members and a designated charity. 66 In some ways, this generic phrase makes sense. All these settlements result in third party disbursements, solve distribution problems, and extend from courts equitable power. However, in actuality, courts are approving two different types of charitable distributions: (1) cy pres remainders; and (2) charitable settlements. Though this Article is the first to make this distinction, the delineation is justified. Cy pres remainders result from settlements where all the funds are intended to be distributed to class members. For example, take a $30 million settlement that gives each of the five million class members $6. In small-stake settlements, roughly 10 percent of class members submit 62. See Severin Borenstein, Settling for Coupons: Discount Contracts As Compensation and Punishment in Antitrust Lawsuits, 39 J.L. & ECON. 379, 399 (1996) (explaining how coupons may give defendants a competitive advantage); Christopher R. Leslie, A Market- Based Approach to Coupon Settlements in Antitrust and Consumer Class Action Litigation, 49 UCLA L. REV. 991, 1039 (2002) (same). 63. See 28 U.S.C (2012). See generally Andrew McGuiness & Richard Gottlieb, New Class Action Law Contains Pitfalls for Defendants, 28 CHI. LAW. 60 (2005) (discussing coupon settlement provisions in CAFA). 64. See, e.g., In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24, (1st Cir. 2009); Simon II Litig. v. Philip Morris USA, 407 F.3d 125, 131 (3d Cir. 2005); In re Mex. Money Transfer Litig., 267 F.3d 743, 746 (7th Cir. 2001); Diamond Chem. Co. v. Akzo Nobel Chems. B.V., No (CKK), 2007 WL , at *1 (D.D.C. July 10, 2007). 65. Lane v. Facebook, Inc., 696 F.3d 811, 816 (9th Cir. 2012) reh g en banc denied, 709 F.3d 791 (9th Cir. 2013); see also New York v. Reebok Int l Ltd., 903 F. Supp. 532, 534 (S.D.N.Y. 1995) (settlement distributed to state recreational activities and facilities); In re Toys R Us Antitrust Litig., 191 F.R.D. 347, (E.D.N.Y. 2000) (distributing $57 million to charity and schools); In re Vitamin Cases, 107 Cal. App. 4th 820, (2003) (affirming charitable distribution as entire settlement). 66. See, e.g., In re Holocaust Victim Assets Litig., 424 F.3d 132, 141 n.10 (2d. Cir. 2005); In re Checking Account Overdraft Litig., 830 F. Supp. 2d 1330, (S.D. Fla. 2011); Stanley v. U.S. Steel Co., No , 2010 WL , at *1 (E.D. Mich. Jan. 20, 2010).

12 2015] SAVING CHARITABLE SETTLEMENTS 3251 claims. 67 Hence, a significant pot of money is leftover the amount of which varies depending on how many class members make a claim, but here it would be close to $27 million. That leftover pot is then distributed to a charity or non-profit, a distribution this Article calls a cy pres remainder. The settlement attempted to distribute directly to class members, which partly failed, so the court substituted a different recipient using its equitable powers. 68 Analogically, this is similar to courts power in charitable trusts, thus justifying the cy pres label. 69 In contrast, charitable settlements involve the settlement itself, not just a remainder, making them analytically distinct from cy pres. Severing charitable settlements from cy pres recognizes notable differences between the distribution methods. 70 Charitable settlements do not rely on failed distributions; rather, the original settlement specifically designates money to go to a non-profit or charity. 71 Consequently, charitable settlements are purely a solution to distribution problems and, at most, an extension of the equitable principles underlying the trust doctrine of cy pres rather than an extension of the doctrine itself. 67. See, e.g., Walter v. Hughes Commc ns, Inc., No SC, 2011 WL , at *13 (N.D. Cal. July 6, 2011) ( [A]verage claims submission rates in similar class actions are typically ten percent or less. ); Declaration of Shannon R. Wheatman, Kendrick v. Standard Fire Insur. Co., Nos. 2:06-CV-00141(DLB), 2:08-CV-00129(DLB), 2010 WL , at *1 (E.D. Ky. June 28, 2010) ( Typical claims rate are well under 5% so, in my opinion, a claims rate over 10% is very high. ). These low claim rates are likely attributable to the reality that individuals are not risk averse with respect to small losses. Fitzpatrick, supra note 23, at See, e.g., Superior Beverage Co., Inc. v. Owens-Ill., Inc., 827 F. Supp. 477, 479 (N.D. Ill. 1993) (describing charitable distributions as part of the judiciary s broad equitable powers ); In re Motorsports Merch. Antitrust Litig., 160 F. Supp. 2d 1392, 1394 (N.D. Ga. 2001) (noting courts broad equitable powers allow for charitable distributions). 69. See, e.g., Folding Carton Antitrust Litig., 557 F. Supp. 1091, 1109 (N.D. Ill. 1983) ( We note that, because this fund already exists, the analogy between this case and the trust law origins of the cy pres doctrine is a particularly close one. ). 70. For example, unlike in cy pres settlement, in the charitable settlement context, there is no settlor, meaning there is no one who originally created the fund, with an intent to create a gift at the time of funding. See, e.g., Quinn v. Peoples Trust & Sav. Co., 60 N.E.2d 281, (Ind. 1945); State ex rel. Att y Gen. v. Van Buren Sch. Dist., 89 S.W.2d 605, 608 (Ark. 1936). With cy pres settlements, class members had at least an indirect possessory interest in the potential monetary distribution under the terms of the settlement. Cf. Boeing Co. v. Van Gemert, 444 U.S. 472, 480 (1980) ( Their right to share the harvest of the lawsuit upon proof of their identity, whether or not they exercise it, is a benefit in the fund created by the efforts of the class representatives and their counsel. ). Thus, they can arguably satisfy the settlor requirement. This is not the case with charitable settlements, where the settlement terms do not provide class members with any possessory interest. While the defendant s coffers fund the settlement, the defendant does not satisfy this requirement. The settlement represents money allegedly wrongfully obtained from the class, not a charitable donation. Defendants funding of the settlement is not wholly voluntary but rather intended to end litigation thus meaning they lacked the intent to create a true gift. Thus, there is no settlor in the charitable settlement context further justifying a distinction between the two settlement forms. 71. See, e.g., New York v. Reebok Int l Ltd., 903 F. Supp. 532 (S.D.N.Y. 1995) (settlement distributed to state recreational activities and facilities); In re Toys R Us Antitrust Litig., 191 F.R.D. 347, 349 (E.D.N.Y. 2000) (settlement distributed about or approximately $37 million in new toys through the Toys for Tots program and established a $20 million fund to buy books and computers for schools).

13 3252 FORDHAM LAW REVIEW [Vol. 83 Charitable settlements are either earmarked or wholly charitable. 72 Earmarked charitable settlements designate funds for direct distribution to class members and funds to be distributed to a non-profit or charity. For example, the settlement in In re Checking Account Overdraft Litigation 73 included an earmarked settlement the agreement split the $410 million settlement between class members and charity. 74 In contrast, wholly charitable settlements, like the Facebook settlement Justice Roberts questioned, give the entire settlement fund to a non-profit or charity: no settlement portion is directly distributed to class members. 75 Instead of recognizing these nuances, judicial evaluation of charitable distributions is in a state of chaos. A discussion of judicial review of charitable settlements and the accompanying confusion is the focus of the next section. B. Judicial Evaluation of Charitable Settlements Rule 23(e) requires no special tests for assessing the fairness of charitable distributions. However, because such settlements can involve significant sums of money often millions of dollars 76 judges have generated supplementary common law requirements. These requirements include: a qualifying trigger; sufficient nexus; and lack of collusion. 77 From there, courts also consider how to calculate attorney fees in cases involving charitable distributions. 78 In applying these requirements and quantifying fees, judicial interpretation differs, resulting in confusion and inconsistent outcomes. First, before permitting an alternative distribution, courts require some problem exist with directly distributing funds to class members, i.e., a 72. Compare Assets Litig., 424 F.3d 132 (2d. Cir. 2005) (earmarked charitable settlement), and Stanley v. U.S. Steel Co., No , 2010 WL (E.D. Mich. Jan. 20, 2010) (same), with In re Netflix Privacy Litig., No. 5:11-CV EJD, 2013 WL , at *1 (N.D. Cal. Mar. 18, 2013) (wholly charitable settlement), and In re Vitamin Cases, 107 Cal. App. 4th 820, 824 (2003) (same) F. Supp. 2d 1330 (S.D. Fla. 2011). 74. Id. at The earmarked portion reflected the portion of the class who could not be located because of a problem with defendant s recordkeeping. See id. In addition to an earmarked charitable distribution, the settlement agreement also included a cy pres remainder for any direct distributions that failed. Id. Hence, the percentage of the overall settlement going to charity would not be known until the end of the settlement distribution process. Id. 75. Lane v. Facebook, Inc., 696 F.3d 811, 817 (9th Cir. 2012), reh g en banc denied, 709 F.3d 791 (9th Cir. 2013); see also In re Vitamin, 107 Cal. App. 4th at (affirming cy pres award of an entire settlement). 76. See, e.g., In re Netflix Privacy, 2013 WL , at *1 (approving $9 million wholly charitable settlement); In re Vitamin, 107 Cal. App. 4th at 824 (approving charitable distribution of $38 million to promote the health and nutrition of class members). 77. See, e.g., Lane, 696 F.3d at 821; Nachshin v. AOL, LLC, 663 F.3d 1034, (9th Cir. 2011). 78. See, e.g., In re Baby Prods. Antitrust Litig., 708 F.3d 163, 178 (3d Cir. 2013); Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 435 (2d Cir. 2007); Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1311 (9th Cir. 1990).

14 2015] SAVING CHARITABLE SETTLEMENTS 3253 trigger requirement. 79 This trigger varies: some courts mandate a direct distribution be impossible or impracticable 80 while others allow mere inefficiency to justify charitable distributions. 81 Generally, cy pres remainders where leftover funds exist after distribution to class members satisfy this trigger, 82 but the trigger for charitable distributions is unsettled. For net-zero cases, where the distribution s administrative costs exceed class members individual monetary distributions, most courts approve charitable settlements. 83 Courts are uncertain how to apply the trigger to low-sum cases, however, where costs do not fully exhaust the settlement fund. Some courts define the trigger requirement to require an attempted class member distribution before any distribution to a third party can occur. 84 For example, in In re Lupron Marketing & Sales Practices Litigation, 85 the First Circuit held distributions to third parties can occur only after meeting the American Law Institute s benchmark of 100 percent recovery for all class members. 86 Other courts have a more generous trigger requirement. For instance, the Second Circuit upheld a settlement in New York v. Reebok International Ltd. 87 without demanding any individual distribution prior to creating a charitable settlement. Rather, it approved a wholly charitable settlement because it would be impracticab[le] [to] attempt[] to distribute the settlement proceeds among the multitude of unidentified possible 79. See, e.g., infra notes and accompanying text. 80. See, e.g., In re Matzo Food Prods. Litig., 156 F.R.D. 600, 605 (D.N.J. 1994) (allowing charitable distribution when distribution [is] economically impossible ); In re Dep t of Energy Stripper Well Exemption Litig., 578 F. Supp. 586, 591 (D. Kan. 1983). 81. See, e.g., Lane, 696 F.3d at 825 ( [T]here is no dispute that it would be burdensome and inefficient to pay the $6.5 million in cy pres funds that remain... ); In re Ins. Brokerage Antitrust Litig., 282 F.R.D. 92, 117 (D.N.J. 2012) ( Given the large number of class members, distribution of the Settlement Fund to each member would be inefficient and ineffective. ). 82. See, e.g., In re Airline Ticket Comm n Antitrust Litig., 307 F.3d 679, 684 (8th Cir. 2002); In re Folding Carton Antitrust Litig., 744 F.2d 1252, 1254 (7th Cir. 1984); Glen Ellyn Pharmacy, Inc. v. La Roche-Posay, LLC, No. 11 C 968, 2012 WL , at *1 (N.D. Ill. Feb. 23, 2012). 83. See, e.g., Jones v. Nat l Distillers, 56 F. Supp. 2d 355, (S.D.N.Y. 1999); New York ex rel. Koppell v. Keds Corp., No. 93 CIV. 6708(CSH), 1994 WL 97201, at *3 (S.D.N.Y. Mar. 21, 1994); In re Matzo, 156 F.R.D. at Courts adopting this narrow definition often reference the ALI s Principles of the Law of Aggregate Litigation, which states that the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair. PRINCIPLES OF THE LAW OF AGGREGATE LITIGATION 3.07(b) (2010). Following the ALI Principles lead, the recent Rule 23 Subcommittee Report uses similar language but alters it slightly to consider whether the distributions are sufficiently large to make individual distribution economically viable. ADVISORY COMM. ON CIVIL RULES, supra note 22, at F.3d 21 (1st Cir. 2012). 86. Id. at F.3d 44, 49 (2d Cir. 1996) (upholding the charitable settlement allotted by the Southern District of New York); New York. v. Reebok Int l Ltd., 903 F. Supp. 532, (S.D.N.Y. 1995) (showing how California would distribute these funds to schools, parks, recreation departments, and community youth groups).

15 3254 FORDHAM LAW REVIEW [Vol. 83 claimants without depleting the settlement funds. 88 Thus, the trigger for approving a charitable settlement depends on the court. Second, the common law nexus requirement evaluates the proposed third-party recipients. 89 Most courts evaluate whether the recipient s interests reasonably approximate those being pursued by the class. 90 The closer the nexus, the more gain for class members. 91 For example, Cohen v. Chilcott 92 involved a $1.5 million charitable settlement from an antitrust class claim against hormonal contraceptive manufacturers who allegedly conspired to deny access to cheaper generics. 93 The settlement required the distribution be given to doctors, university health centers, and charities that provide reproductive health services. 94 In approving the settlement over objections that class members should instead receive money, the court highlighted how the distributions increased access to needed drugs a societal benefit intended by the underlying antitrust claim. 95 How the nexus requirement applies varies by court. At least one court has rejected the requirement altogether. 96 Some courts require a close nexus between the asserted claim and the charitable distribution, in terms of purpose and geographic scope of the charitable distribution. 97 Others focus the nexus requirement on the underlying statute s purpose not the specific claim asserted and the charitable distribution. 98 In these courts, it is enough for a charitable distribution to advance judicial access or consumer 88. Reebok, 96 F.3d at Charitable distributions have been used in a variety of ways. See, e.g., In re EasySaver Rewards Litig., 921 F. Supp. 2d 1040, (S.D. Cal. 2013) ( The Cash Fund is non-reversionary... to fund higher education projects relating to internet privacy and consumer protection.... ); In re Checking Account Overdraft Litig., 830 F. Supp. 2d 1330, 1355 (S.D. Fl. 2011) (promoting financial literacy ); In re Compact Disc Minimum Advertised Price Antitrust Litig., 216 F.R.D. 197, 199 (D. Me. 2003) (music distributions to libraries and educational institutions); Diamond Chem. Co., Inc. v. Akzo Nobel Chems. B.V., No CKK, 2007 WL , at *3 (D.D.C. July 10, 2007) (research on globalization and private antitrust enforcement); C. BRUCE LAWRENCE & BARBARA FINKELSTEIN, SPECIAL COMM. ON FUNDING FOR CIVIL LEGAL SERVS., CY PRES FOR CIVIL LEGAL SERVICES: A REPORT TO THE HOUSE OF DELEGATE FROM THE SPECIAL COMMITTEE ON FUNDING FOR CIVIL LEGAL SERVICES 3 (2006), available at WorkArea/DownloadAsset.aspx?id=26860 (legal representation for indigent populations). 90. PRINCIPLES OF THE LAW OF AGGREGATE LITIGATION 3.07(c) (2010). 91. See EasySaver, 921 F. Supp. 2d at 1052; In re Eunice Train Derailment, No , 2012 WL (W.D. La. Jan. 9, 2012) F. Supp. 2d 105 (D.D.C. 2007). 93. Id. at Id. at Id. at 119; accord Albert A. Foer, Enhancing Competition Through the Cy Pres Remedy: Suggested Best Practices, 24 ANTITRUST 86 (2010) ( [B]ecause the funds will be used to promote competition or dissuade the kinds of actions that constituted an antitrust violation, or will benefit society in general, class members who did not assert a claim are indirectly benefited. ). 96. See Shapira v. City of Minneapolis, No. 06-cv-2190, 2012 WL , at *2 (D. Minn. Apr. 26, 2012). 97. See, e.g., In re Airline Ticket Comm n Antitrust Litig., 268 F.3d 619, 626 (8th Cir. 2001). 98. See, e.g., Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011) (requiring a driving nexus ); In re Lupron Mktg. & Sales Practices Litig., 677 F.3d 21, 33 (1st Cir. 2002).